Fall Kicks Off a Colorful Fiscal Forecast

Physician's Money Digest, October15 2003, Volume 10, Issue 19

The leaves are turning, the kidsare back in school, and hopefullywe're all getting back tobusiness. It was a wet andcool summer on the East Coast. Businessesthat relied on sunshine had amiserable season, with heavy rains clogging15 of summer's last 17 weekends.

Buoyant Economic Moves

But while seashore business mayhave suffered, encouraging signs onthe economy are percolating. Interestrates are still historically low, inflationis tame, business inventories are flat,and consumers are still consuming.Meanwhile, industrial production isgrowing and capacity utilization remainsfavorable.

Going into the second week ofSeptember, the focus was on September11 and its aftermath. The September 11attacks on the United States were initiallythought to be a tremendous blowto the US economy. But as FederalReserve Chairman Allan Greenspannoted in several recent speeches, theUnited States has bounced back nicelyand may be on its way to a grossnational product growth near 4% forthe year. In fact, financial analysts fromFirst Call are predicting the S&P 500'searnings growth to be up 19%—sothings are looking better.

Fed Concerns to Watch

This fiscal year, it's a good idea tokeep an eye on the deficit. The federaldeficit is expected to exceed $500 billion,before including President Bush's$87-billion request to pay for the waron terror. Several economists have mentionedthat if inflation does jumpbecause of the deficit, mortgage ratesmay rise, choking the real estate marketthat has kept the US economy afloat forthe past 2 years.

The real estate market enjoyed nicegains as investors and consumers stayedhome and improved their homes, a phenomenonsome refer to as nesting. Butmembers of the fed's rate-setting committeeare confident they can handleinflation. It's deflation and the lousyjob market that they're more worriedabout, as they pointed out in theirSeptember 15 meeting.

Businesses are still waiting to see ifconditions will continue to improvebefore they start hiring again. Thislack of job growth has been the biggestproblem facing the president and hisadministration, leading the 9 Democratsrunning for president to implythat President Bush is clearly to blamefor this occurrence.

Actually, the economy was in a full-blownrecession before the 2001 election.Add the recession to businessethics issues, the September 11 attackson the World Trade Center, and the hi-techslump, and it's really incrediblethat this country didn't go into adepression. In theory, job growth is alagging indicator that typically does notimprove until an economy is well intorecovery mode. All in all, things are notthat bad. It comes down to whether youthink the glass is half empty or half full.

Bright Tech Stocks

Meanwhile, the markets continueto trade higher, with several yearly newhigh lists growing larger daily. GeneralElectric (GE) made a new high as itbought most of Vivendi Universal'sentertainment assets. GE is a diversifiedindustrial corporation, whoseproducts include appliances, lightingproducts, aircraft engines, and plastics.GE also provides television, cable, Internet,distribution, engineering, andfinancial services.

Boston Scientific (BSX) hit new highsas trial results pointed out that itsdrug-eluting stent performed slightlybetter than that of rival Johnson &Johnson. Physicians had expectedBoston Scientific's Taxus IV trial toshow a restenosis rate of 9% to perhapsas high as 11% in patients receiving thecompany's drug-eluting stent.

International Business Machines(IBM) provides customer solutionsthrough the use of advanced informationtechnology. These solutions includetechnologies, systems, products, services,software, and financing. IBM hasbeen on a roll this year, up 54% so far.

Inflation and Stocks

Forbes

The Oil Factor: HowOil Controls the Economyand Your Financial Future

had an interesting article outon inflation and what it can mean to theright stocks. It came up with a list ofcompanies likely to fare well during aperiod of rising inflation, with advicegiven by Stephen and Donna Leeb onbuying small cap, high-growth, and low-leveragestocks as a hedge against inflation from their upcomingbook, (Warner Books; 2004). Thefollowing stocks have marketcapitalizations between $300million and $1 billion, long-termdebt-to-total capital of30% or less, a 5-year earningsgrowth of at least 20% (annualized),and an estimated 2004 price-to-earningsratio less than 17.

  • Action Performance Companies,Inc (ATN), is a designer and marketerof licensed motorsports products relatedto the National Association of StockCar Auto Racing (NASCAR), includingdie-cast scaled replicas of motorsportsvehicles, apparel, and a varietyof memorabilia.
  • Albany Molecular Research,Inc (AMRI), is achemistry-based drug discoveryand development companyfocused on applicationsfor new small-moleculeprescription drugs.
  • Armor Holdings, Inc(AH), is a manufacturer andprovider of security products, vehiclearmoring systems, and security riskmanagement services.
  • J. Jill Group, Inc (JILL), is a multichannelspecialty retailer of women'sapparel, accessories, and footwear. Thecompany markets its products throughcatalogs, retail stores, and an e-commerceWeb site.
  • Oil States International, Inc (OIS),is a provider of specialty products andservices to oil and gas drilling and productioncompanies throughout the world.
  • Quiksilver, Inc (ZQK), producesand distributes clothing, accessories,and related products for active-mindedpeople. It develops brands that representa casual lifestyle popular withyouth who are involved in skateboardingand surfing. For more informationon the companies, visit the Forbes Website (www.forbes.com).

Whirlwinds' Effects

Also worth noting are the significanthurricanes bearing down on both UScoasts. Some experts predicted Isabel,which stirred up the East Coast lastmonth, to be the mother of all stormsof the past 100 years. Insurance stockssuffered declines as investors equatedthe storm with large losses.

But looking back on history, it turnsout that past natural disasters actuallyhelped insurance companies' earningsin the long run. Though stocks took ahit when the storms wreaked havoc, theprices of those stocks recovered nicelyafter insurance companies felt compelledto raise rates. While we can'tpredict the future, no one can say thatthe same thing won't happen this time.It's something to watch for as we stockup on duct tape and canned goods.

Ernest Caponegro is a NewJersey–based registered representativeaffiliated with FirstMontauk Securities, memberNASD/SIPC. He welcomesquestions or comments at888-786-9507. Any opinionsexpressed are the author's and do not necessarilyreflect the opinions of First Montauk Securities orthose of its officers, directors, or affiliated registeredrepresentatives.